For many years corporations have sought an efficient and flexible method of funding for corporate employee benefits. For example, U.S. Pat. No. 5,136,502 to Van Remortel et al. teaches a system which permits a corporation to prefund corporate retiree health care liabilities using a VEBA trust and variable life insurance. The problem facing US businesses, however, is that the use of a trust (such as a VEBA trust) typically carries with it a significant problem--a trust, such as the one described in the Van Remortel patent (a 501(c)(9) trust under the tax code), is exposed to a 100 percent reversionary tax. This means that even if for some reason a funded liability disappears, monies contributed to the trust cannot be used for any other corporate purpose. The practical implication of this law is that a dollar contributed to a 501(c)(9) trust cannot be used by the corporation for anything other than health care, even in the event the corporation's obligation to pay for health care disappears.
As a result, the system and the funding method which the Van Remortel patent describes has seen limited application. Great uncertainty exists regarding the future of the retiree health care liability, and how it will be paid in the future. Therefore, few companies have actually implemented the funding method described in the Van Remortel patent. Thus, most companies have maintained significant unfunded retiree health care obligations, and accordingly, most workers face the risk that someday their benefits will not be paid to them should their employer have future financial difficulties.
There is a need for a system that provides corporations with a means for funding corporate liabilities so as to permit the corporation to establish a savings vehicle that does not require the corporation to "throw away the key" once the funds are placed in the vehicle. Thus, the savings may be used to pay for a corporate benefit obligation so long as the obligation remains in effect. However, corporations want to know that the savings vehicle will allow the corporation to have access to the funds in event, for whatever reason, the liability disappears in the future. Accordingly, there exists a need to determine, manage and determine allocations, in real time, for an indenture plan that has the foregoing attributes. In particular, there is a need for a system that implements a new employee benefit funding program that avoids exposure to reversion tax.
According to the present invention, such a program (herein called a BENCORE.SM. program) exists when a corporation purchases corporate owned life insurance (COLI) on its employees and/or retirees and the following features are added
1) The insurance policy includes a spendthrift settlement option that applies to all policy distributions. PA1 2) An "Indenture Agreement" is signed between the corporate policy owner and carrier who issues the policy. PA1 (1) monitors the relevant company benefits paid and compares that amount to the cumulative life insurance policy distributions; PA1 (2) in real time, compares unreimbursed company benefit expenses to life insurance policy benefits payable so as to determine what amount may be distributed; PA1 (3) prepares reports that aid the company in fulfilling its reporting requirements under Generally Accepted Accounting Principles; and PA1 (4) aids in the reconciliation of its data and calculations with those of other computer systems at the Carrier.
Very briefly, the terms of the Indenture Agreement require that all death benefits (and any other policy distributions) be retained by the carrier until such time as the corporation pays the employee benefit named in the Indenture. The test is a cumulative one, from the date of inception of the funding program. When cumulative death proceeds exceed cumulative benefit payments, then the excess is held at interest by the carrier to be remitted only when additional future benefit payments are made.
By limiting policy distributions to the benefits being funded, a BENCORE.SM. program is able to achieve "plan assets" status under Generally Accepted Accounting Principles (GAAP). As a result, the assets can be offset against the benefit accrued liability and the income from the policy is an offset against the annual net periodic expense accrual. The different types of employee benefits that could be addressed by a BENCORE.SM. funding program include those described in FASB Statement No. 106 (postretirement benefits other than pensions, e.g., retiree health care), FASB Statement No. 112 (postemployment benefits, e.s., disability payments) and even FASB Statement No. 87 (pensions).
The spendthrift settlement feature of the insurance contract helps to assure that the payment of death proceeds (and other policy distributions) can only be applied to reimburse the particular benefit being funded. As a result, once in place, policy distributions cannot be diverted from their intended purpose.
As a result, so long as the life insurance funding program remains in effect, the benefit obligation will be paid. If future generations of management fail to pay the benefits owed employees, then under the indenture agreement the corporation will not receive the life insurance policy death benefits. If, on the other hand, for some reason the benefit obligation disappears (e.g., in the case of retiree medical benefits, health care reform legislation eliminates the corporate obligation to pay for promised health care benefits), the indenture agreement would expire, allowing the corporation to have complete and unencumbered rights to the policy(ies).
In order for the BENCORE.SM. program to be successfully implemented and operated, however, there must be a real time means of comparing the cumulative benefit payment amount with the cumulative policy death proceeds (and any other distributions). Over the life of the benefit obligation (for example, the lifetime of the longest living employee in a group) the amount of the benefit obligation for the group from plan inception (e.g., the retiree health care cost) is compared with the policy proceeds (life insurance policy death benefits).
Possibly even more important is the real time tracking of the funds on deposit with the carrier when policy death proceeds (and other distributions) exceed benefit payments. These funds will earn interest which is added to the deposit balance. The interest income is taxable to the corporate policy owner--as a result, the amount due for income taxes can be distributed to the policy owner. Accordingly, the amount of taxes accrued must be treated in the same manner as benefit payments. To effectively administer the program, it is necessary to have available a current tax expense accrued amount at any point in time.
Therefore, in order for the carrier to perform its duties under the indenture agreement, it is necessary to have on-going real time monitoring of corporate benefit obligations and indentured assets on an integrated basis. Specifically, it is essential to have a computer system that:
To date, no known monitoring or accounting system exists that is capable of fulfilling the four tasks defined above. The operations that are required to be performed by a system having the above features are complex, particularly when the results are required on a real time basis.